European airlines are battling soaring fuel prices, weak demand by cash-strapped consumers due to the euro-zone debt crisis and the burden of new taxes on air travel, as well as fierce competition from low-cost carriers such as Ryanair (RYA.I).

Ryanair overtook Iberia, part of International Airlines Group IAG.L (ICAG.L), as Spain's leading airline by passengers last year. About half of all flights in Spain are low-cost, making it difficult for Iberia to make money with its traditional business model.

"What was unprofitable becomes profitable as of today," Rafael Sanchez-Lozano, chief executive of Iberia, told reporters.

Iberia Express, with business and tourist cabins and four different ticket options starting at 25 euros one-way, will begin flights on March 25 from Madrid to Majorca, Alicante, Malaga and Seville.

The airline with some 500 employees, plans to fly to 17 national and European destinations including Dublin, Naples and Amsterdam this year and estimates it will attract 2.5 million passengers.

The low-cost launch has been clouded by union opposition, with Iberia pilots staging 10 strikes this year to protest against what they say is a violation of agreements signed with Iberia when it merged with British Airways to create IAG.

IAG has warned that earnings this year could be hurt by its loss-making Spanish unit.

"Iberia Express is the only possible alternative for Iberia," Willie Walsh, chief executive of IAG, said earlier this week in Berlin.

Iberia Express, also conceived to feed Iberia's more profitable long-haul routes to Latin America, will be a member of the Oneworld alliance.

(Additional reporting by Robert Hetz; Editing by David Holmes)

• A Permanent Economic Emergency